Global Financial Markets Several Economists Essay
- Length: 9 pages
- Subject: Economics
- Type: Essay
- Paper: #11785824
Excerpt from Essay :
They state that the FOREX market represents "the market in which participants are able to buy, sell, exchange and speculate on currencies. The forex markets is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The currency market is considered to be the largest financial market in the world, processing trillions of dollars worth of transactions each day" (Investopedia, 2009). Otherwise put, the foreign exchange market represents the place where one currency is being sold and another is being bought, such as an American selling his dollars and buying euros in exchange.
The foreign exchange market is the largest single market on the globe. Its median trade is of $1.5 trillion per day, almost 100 times more than the daily trades of the New York Stock Exchange. Upon entering the Forex market, the investor has to meet several criteria, such as a minimum of capital. The criteria are set and implemented by the SEC (Securities and Exchange Commission) and they make the market superior to the stock market (Miliaresis, 2005).
An interesting aspect of the foreign exchange market is that it can be used as a tool to influence monetary policies. For this to occur however, the currencies cannot be all pegged or floating. The most common intervention in the FOREX market with the purpose of influencing monetary policies revolves around modifying the inflation rates. In this instance then, the state will implement a series of interest rate adjustments and will engage in purchases of foreign currency. "According to the model interventions (purchases of foreign currency) will be negatively correlated with interest rate deviations from the steady state level but positively correlated with interest rate deviations pertaining to non-stabilizing motives or a binding zero lower bound. The model also predicts that interventions will be decreasing in inflation expectations and in the real exchange rate but increasing the expected interventions" (Post, 2006).
Central banks have often intervened on the foreign exchange market and their aim has been a policy one, rather than an economic one, mostly since the quantity of money traded or owned by a country, domestically, would not suffer any modifications. The second reason as to why national banks would interfere on the foreign exchange market is based on the portfolio model balance and sees that a state will be able to influence the exchange rate by modifying the amount of domestic and foreign bounds traded.
Then, a third reason as to why banks intervene on the Forex market is that on trying to maintain or generate price stability. This situation is achieved as interventions on Forex are a discretionary tool in the hand of the central bank, and most importantly, when the monetary tool of interest rate is no longer effective as a means. The transparency of these operations has often been limited to non-existent and as a result, the specialized literature only presents few references to the issues of the Forex through the lens of the domestic monetary policy (Post, 2006).
3. International and Domestic Banking
The latest global modifications impacting the financial sector have led to the creation of international banking, as opposed to domestic banking. In a highly simplistic formulation, domestic banking refers to the banking operations which occur within the enclosed territory of a particular country and are aimed to the benefit of the local consumers, investors, population etc. International banking on the other hand, incorporates all banking operations present in the global field and within international markets.
However the two concepts and sets of activities do share some similarities, they also reveal differences. They start with the basic definition of each concept. In this order of ideas, domestic banking "provides a broad range of financial products and services to retail, small business, commercial and wealth management customers across" the respective country (Website of the Scotiabank). International banking on the other hand, is defined as the "cross-border and cross-currency facets of banking business" (Lewis and Davis, 1987). Otherwise put, a first difference resides in the target of the operations: whilst domestic banking addresses the locals, international banking addresses the global entrepreneur, investor, consumer and so on. Then, the object of the operations is yet another difference: whilst domestic banking generally deals with the national currency (loans and deposits in the national currency), international banking institutions deal with various currencies.
A misconception that has to be cleared here refers to the type of activity undergone by the international banks. The general belief is that international banking operators solely work with multinational organizations. However, this is not true as they also operate at local level. In this order of ideas then, international banks offer retail and individual services to individual consumers in various countries and numerous times, they compete 'head on' with the domestic providers of banking services.
A difference is however available at this point, and it materializes in that despite their offer to retail and corporate consumers and their competition against domestic banks, international institutions generally offer a wider and different palette of financial products and services that domestic banks do. The basic product and service offering of international banks includes: "money transmission and cash management, credit facilities (loans, overdrafts, standby lines of credit and other facilities), syndicated loans, debt finance via bond issuance, other debt financing including asset-backed financing, domestic and international equity, securities underwriting ands fund management services, risk management and information management services, and foreign exchange transactions and trade finance" (Casu, Girardone and Molyneux, 2006).
In terms of money transmissions and the cash management procedures employed, these are generally superior in international institutions, as opposed to more rudimentary in domestic banks. Relative to credit facilities, international banks have a wider access to resources and are therefore able to make a more favourable offer to the consumer or the corporation; also, relative to the corporation, international banks have the ability to offer them several commitments and guarantees. Syndicated loans, offered to a single solicitor by a combination of two or more funds, offers increased access to resources and an increased stability, in case of any disturbances on the financial market. Then, international banks also allow their corporate clients the ability to raise funds through the issuing of bonds; the most common ones being the Eurobonds, the foreign bonds and the global bonds (Casu, Girardone and Molyneux, 2006).
International and domestic banking institutions differ in various instances, the main ones revolving around the currency in which they operate, the types of customers they address, the access to resources, the ability to form partnerships, or the diverse offering of products and services.
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